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I’m always amazed by people who think that they can make ‘quick bucks’ (or, its sister currency: ‘easy bucks’) just by fiddling with paper …

… if trading stocks, options, FOREX, or commodities is something that you really want to do, I should at least teach you all that you really need to know before you begin.

And, it all has to do with catching monkeys …

But, rather than hearing it from me, far better to learn from the masters at Goldman Sachs, whom – or, so I am told by a very unreliable source – share this story with every new hire on their very first day of training:

Once upon a time in a village, a man announced to the villagers that he would buy monkeys for $10 each. The villagers, seeing that there were many monkeys around, went out to the forest and started catching them.

The man bought thousands at $10 and as supply started to diminish, the villagers stopped their effort.

He further announced that he would now buy at $20 each. This renewed the efforts of the villagers and they started catching monkeys again.

Soon the supply diminished even further and people started going back to their farms. The offer rate increased to $25 for each monkey captured and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!

The man now announced that he would buy monkeys at $50!

However, since he had to go to the city on some business, his assistant would now buy on behalf of him.

In the absence of the man, the assistant told the villagers, “Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35 apiece and when the man returns from the city, you can sell each monkey back to to him for $50 each. He’ll be none the wiser and we’ll all have made some easy money!”

The villagers squeezed together all their savings and bought all the monkeys.

Then they never saw the man nor his assistant again … of course, now there were monkeys everywhere!?!

Whilst I was traveling, I hope that you had a little time to reflect on some of the advice that I’ve been dishing out over the last few years?

It’s important that you don’t just follow my (or anybody’s) advice blindly, else you may end up making some fatal logic errors like this poor bloke:

Suppose I have 100K in an index fund that has a ten year return of 7.4%, a five year return of 8.2%, a 3 year return of 17.5%, and a 1 year return of 24.76%. That is a pretty dependable return over the last few years, but it will probably not keep up with the 24.76% return, but will probably maintain at least a 7% return over the next year. So I assume that 7% return.

I want to buy a car for 100K. I can take money out of the index fund to buy the car, and give up $7000 over the next year. I can borrow money at 2% and pay $2000 in interest over the next year. If I choose to pay cash, I lose $7K, but if I borrow and leave my own $100K in the mutual fund, I pay $2K and earn $7K, for a net gain of $5K.

So my logic says that paying cash for anything when the investment return is higher than the interest rate is a mistake. Suze Orman won’t give me advice on this, so if my logic is off, I hope someone will show me better logic.

Have you spotted the flaws?

Well …

The principle of taking a 2% loan on the car so that he can invest at 7% elsewhere is sound, BUT his assumptions are wrong:

1. A low-interest car loan is generally subsidized by price.

Check the true rate, if it’s more than 2% then he is probably better off negotiating the cash price lower THEN doing his cash v finance analysis.

[Source: http://www.bankrate.com/]

2. Unless he’s planning on a 7+ year auto loan, the correct comparison is the finance rate on the loan against a CD for the same term.

This is because the stock market is way too volatile and he needs an investing horizon of at least 7 – 10 years before returns even approach ‘normal’.

His ~25% of last year could just as easily be a LOSS of 48% next year. Look what happened in 2008:

But, he redeems himself, somewhat:

The same logic applies to my mortgage: I pay 2.62% on my house. I could pay it off, but taking the money out of an international fund with a one year return of 22.85% would result in a net loss of $100k over the next year (moving $500K from an investment at 22.85% to pay off a $500K balance at 2.62%).

4. On the other hand, his mortgage comparison is ideal:

If you can lock in a 3o year mortgage, fixed at today’s ridiculously low rates, and lock that money into a low-cost index fund for the same period then, yes, you are almost assured of a 3%+ net return, compounded for 30 years (which means that he should almost return 1.5 x his initial investment PLUS whatever profit he makes on your property).

That’s why real-estate is such a great long-term investment, and why the stock market is a terrible short-term gamble.

On Quora, somebody asked for “something I can learn in 10 minutes that will make me rich?”

The obvious answer is: “not much”.

But …

… this is my blog, and I’m up for a challenge.

In fact, I think you can learn pretty much everything that you need to learn about getting rich in just 10 minutes.

Unfortunately for me, if I’m right, you’ll know everything you need to know in just this one post, so you’ll have no need to keep reading …

… and, if I’m wrong then you’ll simply delete your bookmark to this blog, as it will prove I can no longer deliver.

It appears that I lose either way 😉

Even if this puts this blog out of business, I’m willing to take the 10 Minute Challenge because it also puts every other best-selling ‘get rich’ spruiker – and, let’s face it, most of them are crooks – out of business, as well.

And, that’s worth the sacrifice …

So, here goes:

I think the number one thing that you can learn in 10 minutes is: “what is your Number?” … in other words, how much is ‘rich’ for you?

For example, think about how much annual income you would need (start with $250k p.a. and work your way upwards) and multiply that number by 20.

[AJC: the question was about “rich”, so the answer needs to be $5m to $10m++ … but, this exercise is still valid even if your Number is based on 20 times $50k or $100k]

Once you have that Number in your head, think about how long you are prepared to wait before becoming ‘rich’ (if you are prepared to wait more than 5 to 10 years, surely you can give this exercise longer than 10 minutes)?

Once you have those two numbers, a few minutes playing with this Compound Annual Growth Rate calculator will tell you what % return you need on your investments each year, over that time frame.

Finally, 30 seconds with this chart will tell you everything that you need to know about how you can get rich, which was your original question:

Financial projections for a new company are ludicrous. If we could project financials accurately for a public company for even one day, we’d be billionaires. How can we think we can project reliable financials for a company that doesn’t even exist?

Having worked (actually funded) close to 30 startup businesses to date, I wholeheartedly agree!

In fact …

… I have never written a business plan for any of my businesses.

But, I have used financial projections and written executive summaries for three specific purposes:

1. To impress people

I have used a short, one page ‘executive summary’ (like this one) to impress other people i.e. as a ‘sales tool’ for clients, bankers, and investors.

But, make no mistake, these are largely works of faction (fiction dressed as fact) i.e. to be used purely as marketing documents: proposals, marketing and sales presentations, and the like. Do not mistake them with documents actually intended to convince yourself of your business’ future success. For that purpose, I use the following two types of plans …

[AJC: The executive summary that I have shared with you has a place close to my heart: it was my first attempt at a purely online business as a founder/investor. We built the site, but never launched it. It was wonderful, overly ambitiously wonderful … the web equivalent of Howard Hughes’ Spruce Goose]

2. To check if my business is an opportunity worth pursuing

This type looks like the financial part of a business plan, but it’s not a plan, it’s actually a sanity-check:

I did this kind of financial plan (the kind that Mike says is “ludicrous” … and, I would usually agree) only once and you should do the same:

… for me, it meant lots of traveling and time not earning an income (basically, it meant very early retirement). It sucked because now that I knew what I really wanted to do with my Life, I could no longer just sit around and wait for it – and, my business – to ‘just happen’.

So, to passively fund the true cost of my new-found life (an expensive one!), I knew that I simply had to come up with $5 million dollars in just 5 years!

[AJC: for new readers, this is how I came up with the title of this blog, because I actually ended up making $7 million, but it took 7 years]

Now, there was just one small problem: in 1998, I was over $30,000 in debt!

So, I quickly realized that the only hope that I had of going from negative $30,000 to positive $5 million in 5 years was if I could make my business worth that much, quickly.

Working backwards, I asked around (i.e. my accountant and my friends who had their own businesses) to see what my business would need to ‘look like’ in order to be worth $5m to somebody else? The general consensus was that, as a private company if sold to a private seller, it would be worth around three to five times it’s annual taxable profit.

That means my business would need to generate $1m to $1.5 million in profit each year within 5 years …

… with only one small problem: it was currently losing money!

So, in comes the ‘business plan’:

All I wanted to know was: “was it even possible for my business to generate $1m to $1.5 million in profit each year?”

So I drew out a basic business plan (actually, financial forecast) with outrageously large sales growth (and, commensurate growth in expenses) to see: “at what annual sales volume (less reasonable expenses) will it be possible for my business to generate $1m to $1.5 million in profit each year?”

Once I found that revenue (i.e. sales or turnover) number, it was then relatively easy – again, with the help of a spreadsheet – to work out exactly how many customers that I would need, based on some guesses around the size and frequency of their average purchases and so on …

[AJC: now, I’m not even good with numbers and spreadsheets, but I didn’t even need my accountant to help me do any of this; but, if you need the help of yours, go ahead … it’s what they are there for!]

So, with the help of this ‘business plan’ (actually, the ‘financial forecast’ part of the business plan … but, it’s much the same thing), the question became a fairly simple one: ” can I find enough customers to make my business generate $1m to $1.5 million in profit each year?”

Sadly, the answer was: No.

My business would have needed each and every one of the Top 1,000 Corporations in Australia as my clients; given that I currently had 5, that was going to be a stretch [read: impossible] 🙁

So this form of business planning was for one reason and one reason only: to tell me if my business was an opportunity worth pursuing.

The answer, of course, was no … at least, not in it’s current form.

But, it pointed me to the right answer: which was to find markets that were much larger than Australia and relocate. Which we did … to Chicago … and, the rest is history.

[AJC: as it happens, I also had a financial epiphany, and realized that I should be investing – rather than spending – my businesses increasing profits, so a lot went back into the business, so that I could grow without needing to borrow or raise outside capital, but all of the remainder went into passive investments: stocks and real-estate. And, it’s these investments that took me to my first $7m in 7 years. Eventually selling my businesses was a huge dollop of cream on top!]

3. To check if the business can break-even

I do one other kind of business plan (again, I’m now just focussing on the financial forecast section … I never write the other 30 pages typical of most business plans): it’s the one that looks like a typical business forecast spreadsheet [you can download a copy of this example, here]:

This one has a yearly projection of expected revenue growth, offset by expenses.

But, there’s only one thing that I’m looking for …

… it’s the column, where the bottom-line turns from red to black (actually, from negative to positive … from a loss to a profit)!

In fact, I’ll then fiddle with the numbers in that column to get the ‘bottom line’ number as close to $0.00 as possible (without being pedantic), because what I’m really trying to get a feel for is …

… the point where the business breaks-even.

[AJC: in this example, the 2008 column is closest to zero profit (showing a $107,000 loss), and just a few tweaks to the revenue and expenses quickly go that closer to $0.00, or break-even]

I do not care what Date the column says, that isn’t the point.

I do care what the numbers in that column look like:

– Does the sales number look achievable (i.e. for my business, is it more like 6 or 7 mid-size corporate customers than 1,000)?

– How many staff will I need? How big an office? Am I now going to bump into better funded competitors and have to try and steal all their customers, or is the market big enough for all of us?

It’s so funny when I hear people being so protective of ideas. (People who want me to sign an NDA to tell me the simplest idea.)

To me, ideas are worth nothing unless executed. They are just a multiplier. Execution is worth millions.

That’s why I don’t want to hear people’s ideas.

I’m not interested until I see their execution.

Derek Sivers’ chart shows that even the best idea is only worth $20 (whilst the worst ones – which means most ideas – will actually lose you money).

On the other hand, great teams can make even a mediocre idea fly, and take a great idea from zero to IPO in just a few, short years.

So, this chart’s just an example, to illustrate an idea, right?

No.

According to David S Rose (a third generation serial entrepreneur/investor who has personally invested in over 80 businesses), it’s actually a remarkably accurate tool for assessing the current value of the new Internet and traditional businesses springing up all over the place …

Could it be that Google and Yahoo selected badly? Or, is it simply that a corporate cannot execute on these $20 ideas as well as their $1,000,000 founding teams?

The clue is in Google’s failed acquisition of Dodgeball … the founder left and started his next business: the hugely successful Foursquare.

So, in this case, Dennis Crowley (founder of both Dodgeball and Foursquare) came up with the $20 ideas but, in Google’s hands, execution of his first idea was worthless ($1), whilst his own execution of his second idea was clearly worth millions.

The Lifestyle Business

But, what happens if you take a pretty weak idea and give it to a good aspiring-entrepreneur?

Then you have Josh, who started a web-site drop-shipping high end camera gear from China to photographers all over the world, straight out of college.

That was a year ago, and now Josh has a great little business.

The idea may not be very good (after all, anybody can set up an online eCommerce store in about 5 minutes these days, and drop-ship stuff from the USA and China), but he has executed on his ideas when so many others simply don’t put the time and effort in, so they fail before they even begin …

…. so his $1 idea x his $100,000 execution really has given him a great ‘lifestyle’ business … earning him over $100k p.a. in just over a year.

Not bad for somebody so young; not bad for anybody who doesn’t have their eyes set on reaching the stars.

Not so, Ruslan Kogan …

Ruslan, a young Australian, was exactly like Josh, just a few years ago:

Kogan started drop-shipping TV’s and other electronic gear from China to Australia. But, what elevated his idea from an easily replicable $1 idea to a $15 ‘great idea’ was branding everything with his own name: Kogan.

But, what turned his $15 ‘great idea’ into the multi-million dollar business that it is today is amazing execution ($10,000,000): http://www.dreambuildinspirelead.com/3-lessons-from-entrepreneur-ruslan-kogan/

Thanks to all of you who voted, especially those who backed up their vote with an opinion (via the comments section of my post)!

Jason asked whether he should continue renting the commercial condo that his business is in for $1,800 per month OR buy it for $160,000? When he asked his friends earlier he didn’t get much help:

I have asked a lot of people and get about half giving me one suggestion while half give me the opposite!

Unfortunately, as is often the case with these difficult decisions, our vote is split 3:2 … but, in favor of buying the building.

For example, Zach is emphatically FOR buying the building:

More information would be helpful, but that seems like a good price for $1,800/mo rent. Business or no business, I would take that deal every time.

Whilst, Victor is equally AGAINST:

Don’t invest in something you don’t know much about, you know your business, invest in that, pass on what you don’t know.

So, Jason is right back where he started 🙁

My general advice in these situations, without having nearly enough enough info to give specific/personal advice, is to …

… do both. Every single time.

You see, it comes from the advice that my Grandpa once gave me: I remember him recounting an argument that he had with Grandma when they were just starting out. Grandma wanted to buy a modest home, instead of renting what amounted to little more than dumps, being all they could afford as poor immigrants, but my grandfather had other ideas; he said:

From a business, you will always be able to buy a house. But, from a house you will never buy a business.

Sound advice (it certainly guided me), but how does it help in this situation?

Well, it applies in reverse: when you have a business that’s generating cashflow, you have to start thinking about external investments, and buying your own premises is often the best place to start. Of course, you still have to keep the reinvestment needs of the business in mind … after all, that’s what’s generating the cash!

But, what happens when it seems you don’t have enough capital to do both?

That was the situation that I found myself in when we outgrew our last rental office:

I found a building that we could rehab for our purposes, but that I felt had good future capital appreciation value: in other words, a building that I thought – first and foremost – would be a good investment.

It was way over budget (e.g. when comparing old rent v new mortgage), but it seemed too good an investment opportunity to simply pass up.

I had no idea how to value it properly, and it was going for auction, but I found out that the only other serious bidder was a property developer. I knew that he would only pay land value, not much more.

This was a trick that I had employed successfully once before: find a property that developers are interested in, but that you want to own/occupy and pay $1 more than they are willing to bid.

And, nothing could be simpler – or make more sense – than The Watermelon Plan.

Simple?

It has to be; you see, this ‘plan’ was created by an 8 year old!

Here’s the plan, as told by the boy’s uncle, Jack:

I will never forget my little 9 year old cousin who lives in the UK, who shared a pretty simple money making plan with me. He told me he is planning on:

1. Buying a watermelon for $5
2. Cutting it up into 10 pieces and selling each piece for a dollar.
3. Go back to the store and buy 2 watermelons.
4. Etc.

I love this simple and basic business-building thought process.

There’s nothing difficult about making money if 8 year olds can do it.

And, they can. Here’s proof … a little closer to home … It’s my son’s story, as told on Quora:

At 10, my son wanted to start a cake shop outside his grandmother’s house (naturally, she would bake, he would sell).

But, at 12 y.o. he came to me and asked for $50 to start his new business on eBay. He offered me 49%. I accepted, just to see what would happen.

And, something did happen: a week later a package from China arrived at our front door, and over the next week a few smaller packages left the same way.

Two weeks later, my son came to me and said “here’s your $50 back” … he bought me back out!

[I didn’t have the heart to tell him that it doesn’t work like that. That’s probably the only non-commercial assistance that I’ve given his business in the last 6 years].

Since then, after growing his eBay store for 3 or 4 years, my son ‘graduated’ to an online service-based business that nets him in excess of $60k p.a. (turning over $100k++ p.a.) and has bought him a car whilst still in high school.

He contracts programmers in India and has 2 full-time customer service contractors in Manila. One of them just sent him a Christmas present and a card thanking him, saying that – because of my son – he can now fulfil his life ambition of opening up his own coffee shop.

Not only is my son setting up his own life, he’s changing other people’s lives already … and, he’s just finished high school.

With luck, you – or your children – may be able to embark on a similar journey.

This analysis confirms that it is possible to get a 19% Cash-on-Cash Return, but:

1. You need to have a 15 year outlook; the first year produces a loss,

2. The assumed rent is VERY high.

The reality is that most residential real-estate tends to produce negative returns in the early years, and capital gains over the longer term. Whereas commercial real-estate tends to produce higher earlier returns but lower capital growth.

Still, by purchasing well, adding value (e.g. through a clever & economic rehab) it is possible to produce fairly reliable (when compared to the up’s and down’s of the stock market) cash-on-cash returns that blow away most other consumer-grade investments.

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